IPO Lot Size: Meaning, Calculation And Example

When a company goes for an Initial Public Offering (IPO), one of the primary things investors look for is the lot size. Understanding lot size is essential because it helps you determine the amount of money you need to invest in an IPO. So, what is IPO lot size, and what are its various aspects? Let us find out.

What Is Lot Size In IPO?

Imagine this. You go to the market to buy potatoes. Can you buy a single potato? No. You need to buy in kilograms, 1 kg, 2 kgs, 5 kgs and so on. The IPO lot size concept works somewhat similarly. You do not buy a single share in an IPO. You buy in lots.

The lot size refers to the minimum number of shares you must apply for in an IPO. The lot size varies across IPOs. You need to submit your IPO application in multiples of the lot size. Before a company goes public, it announces the lot size.

Why Lot Size Matters?

Let us now understand why lot size matters in an IPO. It helps to understand:

• Minimum Amount To Invest

The lot size shows the minimum amount you need to apply for shares in an IPO. Suppose the price of a share in an IPO is ₹200 per share and the lot size is 70 shares. In this case, the minimum investment required is ₹14,000. If you want more shares, you need to apply for more lots and pay more.

• Fair Share Allotment

Lot size helps in making the share allotment process fair. With several investors applying for shares in an IPO, shares are distributed in lots via a lottery system. It gives investors a better chance to receive at least one lot instead of a few investors getting all the shares.

• Ease For Small Investors

Lot size also plays a vital role in making an IPO accessible to more investors. When the lot size is small, the minimum investment amount required is also lower and vice versa.

How Lot Size Is Decided And Calculated?

Several things are considered for calculating the IPO lot size. These include:

• Share Price

Share price is one of the primary factors used to decide lot size. If the price is high, companies can keep the lot size small.

This helps keep the total investment amount manageable for retail investors. In other words, in such cases, the lot size may be kept small so that the minimum investment amount does not become too high.

• Issue Size

Issue size represents the total value of shares a company wants to sell in an IPO. If the issue size is large, the company generally gets more flexibility in deciding the lot size.

• Market Conditions

When market sentiments are strong, companies may keep the lot size in a way that allows wider participation.

• Total Number Of Shares Offered

The total number of shares offered also plays a vital role in deciding the IPO lot. Note that companies need to divide these shares into lots so that they can distribute them among different investor categories.

• Regulatory Norms

Capital market regulator SEBI has laid norms to ensure transparency and make sure the minimum investment is within a reasonable range.

Example Of IPO Lot Calculation

Suppose a company plans to launch an IPO. The price band decided is ₹190 to ₹200 per share. When deciding the lot size, the company usually considers the upper end of the price band, ₹200 in this case.

As per SEBI guidelines, each applicant must invest a minimum amount in an IPO. It typically ranges from ₹10,000 to ₹15,000. So the company sets the lot size in a manner so that the investment amount remains close to this range.

Hence, if the expected investment amount is ₹14,000, the lot size comes to 70 shares. It means one lot size has 70 shares. If you want to apply for more shares, you need to apply for more lots.

Minimum And Maximum Lot Sizes: What Investors Should Know?

As an IPO investor, you should be aware of two IPO lot sizes: minimum and maximum.

• Minimum Lot Size

The minimum lot size refers to the smallest number of shares you can buy in an IPO. In other words, you can not buy fewer shares than specified in the minimum lot size. For example, if the IPO's lot size is 100 shares, the minimum investment requirement is four lots, you need to invest in a minimum of 400 shares.

• Maximum Lot Size

The maximum lot size is the maximum number of shares you can buy as an investor. It prevents monopoly. Capping the maximum lot size ensures that shares are distributed among a range of investors.

Real World Example Of IPO Lot Sizes

Let us consider an example to understand the maximum and minimum IPO lot sizes. If we take the example of Fractal Analytics IPO, the lot size was 16 shares. It means that in one lot, one could buy 16 shares of the company.

The minimum and maximum lot sizes for retail investors were 1 and 13, respectively. The minimum investment amount for retail investors was ₹14,400 based on the upper price band (₹900).

So, the minimum amount that a retail investor had to invest to obtain shares of this IPO was ₹14,400 (1 lot). On the other hand, a retail investor had to invest ₹1,87,200 to obtain the maximum lot of 13 lots.

Conclusion

Understanding the concept of IPO lot size can help you understand the minimum investment you need. Decided by the company, the lot size depends on several factors. Not only do they help you know the amount you need to pay to invest, but they also ensure efficient and transparent allocation.

Source

Kotak Neo